Friday, September 2, Financial Optimization
Workshop Chair: Narayanan Jayaraman
Time: 09:00 – 10:30
Speaker: Giorgio Consigli
Title: Asset-Liability Management for Institutional Investors: foundations and two case studies for P&C insurers and pension funds
Time: 10:45 – 11:15
Speaker: Shijie Deng
Title: Multiple Optimal Stopping Problems and Applications in Finance
Abstract: Optimal stopping problems arise in a wide range of financial applications. The classical example is the American-style options pricing problem. In energy mar- kets, various structured supply contracts have multiple early-exercising options em- bedded in them. The pricing of such financial instruments motivates the development of algorithms for solving multiple optimal stopping problems. In this tutorial, we present a couple of algorithms for solving optimal stopping problems and discuss their advantages and needs for future improvements.
Time: 11:15 – 11:45
Speaker: Sebastiano Vitali
Title: Stress-testing of pension fund ALM models with stochastic dominance con- straints
Time: 11:45 – 13:00 – Lunch
Time: 13:00 – 13:30
Speaker: Narayanan Jayaraman
Title: Does Combining the CEO and Chair Roles Cause Poor Firm Performance?
Abstract:Abstract: Considerable disagreement exists over the merits of CEO-Chair duality. We show that firms, depending on their attributes, follow different duality strategies: while some never or always combine CEO-chair positions, others follow a pass-the- baton (PTB) strategy, with chair-promotion conditional on firm performance. We evaluate duality by focusing on the PTB sample. We propose and test a learning model in which the title of board-chair is optimally awarded to retain talented CEOs. As predicted by this model, PTB firms exhibit performance decline following CEO chair-appointment. Underperformance disappears when an appropriate counterfactual is employed. Further, supportive of model — and counter to agency-type explanations — chair-promotions are more likely when boards are independent and, furthermore, increase in post-combination compensation is unrelated to managerial power. Overall, CEO-duality does not harm — and may even promote — shareholder interests. Co- authored with Vikram Nanda, and Chip Ryan.
Time: 13:30 – 14:00
Speaker: Andras Danis
Title: Impact of Labor Constraints on Firm Investment: Evidence from Right-to-Work Laws
Abstract: We analyze the impact of staggered introduction of state level Right-to- Work (RTW) laws on corporate investment. Our difference-in-differences estimation shows that RTW law passage is associated with 14.47% higher investment-asset ratio for firms headquartered in the state, with the effect being more pronounced for financially unconstrained firms. We ameliorate endogeneity concerns using a geographic regression discontinuity design. Our evidence is consistent with both a wage channel, where RTW leads to lower wages, and a debt channel, where RTW affects the leverage ratio, which then influences investment. Our results highlight the role of labor constraints in shaping corporate policies. Co-authored with Sudheer Chava and Alex Hsu.
Time: 14:00 – 14:30
Speaker: Teng Zhang
Title: A Clash of Cultures: The Governance and Valuation Effects of Multiple Corpo- rate Cultures Abstract: This study investigates the effect of multiple corporate cultures on the governance and valuation of a firm. Estimating the cultural distance between the CEO and the board and between the CEO and stakeholders, we find significant effects of both. We find that increased cultural distance is associated with greater CEO turnover, but also with higher firm values. These findings are consistent with the view that greater cultural distance between a CEO and the board results in less em- pathy and acceptance of the CEO, but such distance also provokes greater monitoring and consequently increased firm value. Co-authored with Steve Ferris and Narayanan Jayaraman.
Time: 14:45 – 15:15
Speaker: Alex Hsu
Title: Monetary Policy, Volatility Risk, and Return Predictability
Abstract: Two well-documented empirical observations in the United States econ- omy are a structural break in macroeconomic volatility in the early 1980s, and the predictability of asset returns. We document (i) strong predictive power of several macroeconomic volatility series for stock and bond returns at various horizons, and (ii) a structural break in this predictability around 1980. We develop a long-run risk model with a monetary policy rule to address whether these findings are consistent with changes in the volatility of fundamental shocks, changes in monetary policy, or both. Preliminary results suggest that time-varying volatility in monetary policy shocks in- duces macroeconomic volatility that predicts asset returns as in the data. This pre- dictability decreases in policy regimes with a strong reaction to inflation as a result of reduced time variation in volatility.
Time: 15:15 – 15:45
Speaker: Chang Liu
Title: How Does the Stock Market Impact Investor Sentiment? — Evidence from Antidepressant Usage
Abstract: This study examines the effects of local stock returns on antidepressant usage using the Truven Health MarketScanQR individual prescription drug data. There are three main findings. First, a one standard deviation decrease in local stock return increases local investor’s antidepressant usage by approximately 0.42 percent, causing 2,773 more prescriptions filled (a medical expense of approximately 2.3 million dollars) in the subsequent weeks than would have been in the absence of the decrease in stock return; in contrast, a stock price increase has no impact on antidepressant usage. Second, the effect of stock returns on antidepressant usage depends on an array of local socioeconomic characteristics. Third, local stock return fluctuations have significant effects on certain physical illnesses that are comorbidities of depression. The results are consistent across a variety of robustness checks.
Time: 15:45 – 16:15
Speaker: Jonathan Clarke
Title: When Do Analysts Impede Innovation?
Abstract: We re-examine the impact of analyst coverage on firm innovation and find that the negative relation between analyst coverage and innovation is driven by firms that are poor-quality innovators. In contrast, analysts do not hinder innovation in firms that are efficient innovators. These findings are robust when considering two different identification strategies that control for endogeneity. Our results hold for both innovation output (patents) and innovation input (R&D). Overall, our main findings indicate that analysts curtail wasteful innovation and play a beneficial role in resource allocation in the economy. Co-authored with Nishant Dass and Ajay Patel.